Housing Crisis

While home ownership is rightfully considered the essence of the American dream, the desire to own a home is by no means uniquely American. Consider Wilairux Horpibulsuk, 37, who prefers to go by her nickname, Nong. When growing up in her native Thailand, Nong dreamed of one day owning a home just like her parents, a modest bungalow in a small village where all the members of her large extended family would be welcome. This June, if everything goes according to plan, she'll realize that dream when she, husband Ken French and their seven-year-old daughter Rose move into a brand-new three-bedroom duplex in Cloverdale.

"All my life I've wanted a house," she says, proudly showing off the bare wood-framed interior of the soon-to-be-completed duplex. Yet in a very real sense, her dream-come-true almost never materialized.

Since moving to the North Bay seven years ago, the couple has worked hard to save enough money for a down payment on a home. First they settled in San Anselmo, where Nong worked as a dental assistant and French, 45, tended bar professionally. Their combined incomes barely covered baby Rose's formula and their one-bedroom apartment's $925 rent. Saving money was out of the question.

Four years ago, to save money, they moved to Santa Rosa, where they rented a one-and-a-half bedroom apartment for $700 per month. They were finally able to start squirreling some funds away. Then the landlord raised the rent to $820. At that rate, French calculated they'd have to save another 10 years before they had enough. "I didn't know how we were ever going to come up with the down payment," Nong remembers.

Like tens of thousands of middle-class residents in the North Bay, Nong and French saw their dream of home ownership fading. The magnitude of the problem is stunning. "Affordable Housing for Everyone: Solutions to Sonoma County's Housing Crisis," a 2003 study by UC Berkeley doctoral candidate Nari Rhee and commissioned in part by the Service Employees International Union Local 707, found that "only the top 17 percent of households can afford to buy a median-priced home."

Put another way, that number seems even more stark: less than two out of every 10 households in Sonoma County can afford to buy the median-priced single-family home, which sold for $324,500 in 2002. Since then the median has skyrocketed more than 39 percent, to $449,500 in February 2004. Combine that astronomical figure with what Rhee's report calls "the large concentration of low-wage jobs in the current job market," and it seems reasonable to project that Sonoma County is rapidly approaching the day when only one out of every 10 households will be able to afford the median-priced home.

One out of 10.

Yet incredibly, the run-up in home prices is perceived as one of the few bright spots in an economy that's struggling to pull itself out of recession. It is perceived that way by current homeowners who have either profited or borrowed on dramatically increased home values; by the local daily, which recently published a celebratory story about the number of million-dollar area homes for sale; and it is even perceived that way by local mainstream economists, who in such studies as the "North Bay Economic and Employment Report for 2004" point out that "positive indicators for the economy . . . include a solid pace of house-price appreciation. . . ."

Ironically, this very same report notes that Napa, Marin and Sonoma counties all share a similar economic weakness: the high cost of living, primarily driven by high home prices and correspondingly high rents. And hidden deep in the report, in the final section on Sonoma County, there's even an honest clue as to what might sour the region's fledgling recovery: "Housing market suffers price correction as interest rates rise, diminishing homeowner's equity."

Translation? The Sonoma County real estate bubble just might pop. Make no mistake; by any measure, it's a bubble. In that sense, it's no different than the tech-stock bubble that burst in 2000 and led to the current recession. The tech bubble burst because high stock prices failed to generate dramatically inflated expectations for earnings. The housing bubble could collapse--in Sonoma County, the North Bay, California, the country and around the globe--for precisely the same reason.

While more than one mainstream U.S. economist has noted that investment has flowed from equities into the real estate market worldwide since the tech bubble popped in Y2K, the cheerleaders have yet to develop consensus on whether a new bubble in real estate has subsequently formed.

London's Economist magazine pointed out the obvious last month. "House prices are at record levels in relation to average income in America, Australia, Britain, Ireland, the Netherlands and Spain," the journal reported. "The main reason why house prices have been rising so rapidly in so many countries is the historically low level of interest rates, which has allowed households to borrow more to buy a home. The worry is that what started as a rational adjustment to lower interest rates has turned into irrational exuberance."

"Irrational exuberance." The last time that term was used in all seriousness was in 1996 by Federal Reserve chairman Alan Greenspan, during the initial price run-up in equities that resulted in the tech-stock bubble. This is the same Alan Greenspan who, since the tech bubble popped, has reduced interest rates to record low levels, fueling the loans that have heated up the nation's housing market.

How hot is it? Last year, home prices in America rose 8 percent, including a blistering 15 percent spike in the fourth quarter. In Sonoma County, the housing market is even hotter, rising 15 percent last year alone. With wages and job growth during the same time period remaining relatively flat, more and more people are being locked out of the housing market.

"California continues to suffer from a lack of housing that is affordable for even middle-income families," reports the California Budget Project in its study "Locked Out 2004: California's Affordable Housing Crisis."

"Workers face long commutes between housing they can afford and their jobs, and the high cost of housing leaves families with less income to spend on other necessities. . . . The American dream of home ownership is just a dream for many Californians."

For middle-class families in Sonoma County, "nightmare" might be a more appropriate word. According to "Affordable Housing for Everyone," the hourly wage required for one worker to qualify for the median-priced home in Sonoma County jumped from $28.54 in 1996 to $52.03 in 2002. Yet 67 percent of employees in the county earn less than $15 per hour. The annual income needed to afford the median-priced home, $108,000, is more than double the county's median household income of $53,000.

The problem has not escaped the notice of local politicians. The need for more affordable housing was one of the dominant themes of incoming Sonoma County Board of Supervisors chair Mike Reilly's speech at January's State of the County breakfast.

"While low real estate vacancy rates and rising prices demonstrate that our county is a desirable place to live, we are facing a growing gap between employment and housing trends if we do not provide for affordable housing," Reilly said. "Rather than wait for the situation to worsen, we are committed to working through all available channels, including updated zoning codes, collaboration between county and city governments, and seeking support from state and federal programs, to keep pace with our housing needs."

In fact, it was just that sort of interagency collaboration that helped Nong and French purchase their dream home. The duplex is part of a 36-home "sweat equity" affordable-housing project being constructed by Burbank Housing Development Corporation, Sonoma's County's leading builder of affordable housing. The project, dubbed Ioli Ranch, is being financed by grants from the Cloverdale Redevelopment Agency, the U.S. Department of Agriculture's Rural Housing Service, the California Department of Housing and Community Development, the Housing Assistance Council, and the Rural Communities Assistance Corporation. Nong and French, along with the other low- to moderate-income first-time homeowners who qualified for the project, provide the sweat.

Since breaking ground on their duplex last spring, Nong and French have contributed a combined 30 hours of labor per week on their 1,200-square-foot home, helping to lay the foundation, raise the frames and nail up the sheetrock under the watchful supervision of Burbank's experienced construction crew.

Nevertheless, there's a lengthy waiting list each time Burbank announces a new sweat-equity affordable-housing project. Nong and French were on three lists before finally being selected. Like most of the families in Ioli Ranch, they've been enthusiastically putting in more than the required time, hoping to beat the project's early-June deadline and avoid being penalized by Burbank.

"Most houses run about a month late," French says. "People have been working hard here," Nong smiles as her husband struggles with an outsized sheet of plywood. Burbank considers their labor as sort of an in-kind down payment. The nonprofit company also arranged the low-interest loan that financed the purchase of the $175,000 home. French figures that their labor, if the yearlong project comes in on time, is worth about $28 per hour.

It's no sweetheart deal. Nong and French's mortgage will run between $1,000 and $1,300 per month, a tough nut for a bartender and a dental assistant to crack. The contract with Burbank contains accounting devices that refinance the home if the couples' income changes or the house appreciates in value. As French notes, the home is already worth more than $200,000 on the current market. To prevent new owners from "flipping" homes--selling short to capitalize on the overheated market--Burbank retains 50 percent of the appreciation on any sale until five years of ownership have elapsed.

In a sense, Ioli Ranch represents the final margin of affordability in Sonoma County. "Other than buying a condo, this is our last chance," says Susan Herz, 30. She and her husband, Jason, 36, have also purchased an Ioli Ranch duplex. Susan works as a personal trainer; Jason manages a landscape gardening company. In 1999 they fled Southern California's high real estate prices, hoping to buy a home in more affordable Sonoma County. With the arrival of a baby, they quickly found themselves hemmed in by high rent prices.

The mortgage on their new home will be considerably less than the $1,600 they're currently paying in rent for a three-bedroom house in Sebastopol.The labor they've put in on the project constitutes a $35,000 down payment, money that would have been impossible for them to save.

The 36-home neighborhood that has sprouted virtually overnight in a vacant lot off Cloverdale Boulevard is precisely the type of in-fill development advocated by modern urban planners. Thanks to Burbank, which has been in operation since 1980, thousands of Sonoma County families have realized the American dream.

While Burbank's efforts are laudable, as noted by the California Budget Project in "Locked Out 2004," the roots of the affordable-housing crisis run deep: "Housing production declined significantly during the 1990s. Observers argue that the 1986 federal tax act and subsequent law changes made investments in rental housing less profitable on an after-tax basis. In addition, limits on property tax and other local revenues make sales-tax-generating development more attractive than residential construction."

In other words, the property tax code has directly exacerbated the affordable-housing crisis by discouraging new housing construction and encouraging the spread of low-wage-paying box stores like Wal-Mart and Home Depot across the state, Sonoma County included. Such stores have earned the special ire of Martin Bennett, co-chair of the Living Wage Coalition of Sonoma County. He refers to the phenomenon as "low-road capitalism."

"If you look at the North Coast as a whole," Bennett says from his office at Sonoma State University, where he teaches history, "Low-road, short-term-interest-type developments have a lock on the decision makers at the county and the city level." In Bennett's view, Sonoma County is well on its way to becoming the next "Marin County, with a one-class society [the super rich] that has exported its affordable-housing problem. There is a degree to which this community is not acknowledging its own self-interest."

Wages at box stores seldom exceed $10 an hour. Since 2000 the Living Wage Coalition has petitioned several city councils to enact an ordinance that would require all businesses that contract with local governments to pay a minimum $12.50 per hour. That, of course, is far less than the $52.03 per hour required to purchase a median-priced home in Sonoma County, but nearly double the state's existing minimum wage of $6.75 per hour.

To gain some perspective on what passage of a living-wage ordinance can mean for at least some low-income workers, it helps to look at the California Fair Market Rent tables compiled by the U.S. Department of Housing and Urban Development. The tables measure affordability based on current rents and the prevailing minimum wage. In Sonoma County for instance, a single individual must work 90 hours at $6.75 per hour to afford the median rent for a studio apart-ment, which currently stands at $792 per month.

The Living Wage Coalition of Sonoma County, which is part of a larger, nationwide organization, has met with mixed success. In 2001 the Santa Rosa City Council rejected its living-wage proposal. Last year, the Sebastopol City Council passed a living-wage ordinance, and one is pending decision by the Sonoma City Council in early May. As the recent approval by voters for a new Lowe's Home Improvement store in Cotati demonstrated, many residents have yet to make the connection between the low-wage jobs such box stores provide and their corrosive effect on the local standard of living.

Will Sonoma County break away from conditions where only one in 10 households can afford the median-priced home? It seems doubtful. Even when the economy was booming, local governments and affordable-housing advocates were unable to keep up with the demand that new jobs, a large percentage of them low-wage, created for housing. Only two things can possibly alter the county's course: a radical solution or an economic catastrophe.

One possible radical solution comes from a native San Franciscan, a newspaperman-cum-economist for the most part forgotten today, Henry George. In the 1860s, scanning the growing city of San Francisco, where sand lots were selling for thousands thanks to rampant real estate speculation, George had a revelation. Why were so many people willing to pay outrageous sums for the privilege of living near San Francisco's business epicenter, he wondered. What gave the land its value?

George postulated that what gave the land its value was the community itself. Was it not the very proximity to existing businesses and consumers that accounted for the astronomical prices being paid for land? Therefore, that value should be returned to the community, via a direct tax on land. The value of the land would relate directly to its productive capacity. The higher the productivity, the higher the tax. Landowners who chose to hold productive property off the market in hopes of capitalizing on future price increases would be forced to sell or face paying the tax, thereby making speculation impossible.

George later expanded on this theory, which became known as the "single tax," in his 1879 bestseller, Progress and Poverty. His proposal was nothing short of revolutionary. With arguments that are still convincing today, he demonstrated how a single tax on land values might replace the country's entire tax code, eliminating the need for income, sales and property taxes, levies which the rich generally avoided. Because land cannot be hidden like other assets, the rich would finally be forced to pay their due. As George noted in an 1890 speech in San Francisco, "Go then into our states, take our system of direct taxation. What do you find? We pretend to tax all property; many of our taxes are especially framed to get at rich men; what is the result? Why, all over the United States, the very rich men walk away from under those taxes."

As progressives gained momentum with the approach of the 20th century, George's single-tax theory was heavily in vogue; its proponents envisioned a steady source of revenue that would not only provide local governments the financial means for ensuring that all citizens enjoyed the fruits of progress, but end the serious economic depressions that have plagued capitalism since its inception by preventing speculative spikes in land prices, which George saw as one of the primary causes of downturns.

George's theories were never fully implemented anywhere and fell out of fashion after WWI and the Great Depression. However, in areas around the country and globe that have been affected by rising home prices and declining wages like Sonoma County, government officials are dusting off George's theories and repackaging them as land value tax, or LVT.

Since implementing its form of the LVT several years ago, Pittsburgh, Pa., has experienced a dramatic increase in development of its commercial and residential urban core, and the city keeps turning up on lists as one of the most affordable in the country. Certain cities in Australia have experienced similar results with the limited application of LVTs. England announced last month that it is exploring the LVT as a means of slowing down its runaway housing market. Radical problems sometimes require radical solutions.

And sometimes not. Many residents of Sonoma County are inclined to agree with the first part of county supervisor Mike Reilly's breakfast statement--"Low real estate vacancy rates and rising prices demonstrate that our county is a desirable place to live"--while ignoring the part about the "growing gap between employment and housing trends if we do not provide for affordable housing."

Like Marin's "one-class society," there may be a bit of snobbery at work here. Many homeowners fortunate enough to get in on the housing bubble before it expanded look down on affordable-housing developments. As "Locked Out 2004" points out, such sentiments run statewide: "[N]eighborhood opposition, commonly known as NIMBYism, has blocked or delayed construction of many affordable-housing projects across the state."

Which is to say that people like French and Nong and Susan and Jason Herz can consider themselves fortunate. Those who haven't gotten in on the craze will either have to sign up for Burbank's latest project or wait for the bubble to pop. Will the region's real estate bubble pop? Many Californians, particularly those in beautiful Sonoma County, seem to share a collective belief that home prices go only one direction: up. They might be sadly mistaken. As the "North Bay Economic and Employ-ment Report for 2004" points out, the key will be whether the Federal Reserve raises interest rates.

Alan Greenspan has quite a predicament on his hands. Historically low interest rates have fueled the enormous expansion of personal and corporate debt that's helped pull the economy out of recession. Unfortunately, the trillion-dollar deficits amassed by the Bush administration require bonds to fund them, and because of low interest rates, investors are pulling out of the U.S. bond market. Some members of Congress have already suggested that Greenspan raise the base interest rate a full two percentage points, from 1 percent to 3 percent, to make bonds more attractive to investors and slow down the country's rate of economic growth, which is perceived by some as inflationary. It's a safe bet that Greenspan will delay any rise in rates until after the election, but a rate hike seems inevitable.

When it comes, it could send shock waves through the stock market and regional real estate industries, and there's no scientific reason to believe Sonoma County's charm will ward off the blow. Real estate bubbles pop slowly, but even the initial stages of a home pricing correction can be painful. Homeowners here might awaken to discover their $459,500 median-priced dream house is suddenly worth just $400,000, a change that won't be reflected in the family's mortgage payment.

Families on the margin who have purchased or refinanced their homes at the existing high rates may begin defaulting on their loans. Because much of the current recovery has been driven by a record rush of mortgage refinancing, the shock waves could spread into the economy at large, pulling it back into recession.

Perhaps Sonoma County will weather the storm. No doubt a slight downward price correction, combined with an increase in wages, would make the median-priced home affordable to many more prospective buyers. Or perhaps home prices will just keep going right on up, and only one in every 10 Sonoma County household will be able to attain the American dream.

The answer isn't sexy: watch the interest rate. That will tell the tale.